6 steps to profitability -- from the Financial TImes

Let’s meet when it’s over

By Stefan Stern

Published: November 5 2008 20:28 | Last updated: November 5 2008 20:28

It is here. The recession that many hoped would never come, or prayed they would not have to deal with, has arrived. Others can carry on debating how and why it has happened. Business leaders will want to know what they need to do now.

The usual cycle of responses to a huge shock or upset – denial, anger, bargaining, depression and finally acceptance – is of limited use. Cut straight to acceptance, and then action. But what kind?

In downturns, it is extraordinary how quickly managers rediscover business virtues that appeared to have been forgotten in the good times. Today the cry is “preserve cash”. Cut unnecessary entertaining. End business class travel and five-star accommodation. Get out of the taxi and back on the bus.

First steps on the
road back to profit

● Preserve cash. Not all expenditure can be halted but tougher tests need to be put in place at once to prevent waste.

● Reality check. How bad could things get, really? Plan for the worst, even while hoping for the best.

● Differentiate. Tap into unexploited revenue streams by thinking afresh about your existing customer base. They are not all the same. New customer segments might offer new profit opportunities.

● Innovate. Just working harder at what you are already doing probably won’t produce a different outcome. Do something different. It has got to be worth a try.

● Lead. This is no time to hide
in the bunker. Be visible, upbeat, energetic. If you can’t be, get out of the way and let someone else take over.

● Don’t give up. Take a pay cut. Freeze all new hires. Go to a three-day week. Grant unpaid holiday. There are many ways to keep the bankers from the door. Just keep the show on the road. Something might turn up

But few businesses shrink their way to success. So, even now, smart companies will be trying to plot a path back to profitability.

In a new paper for the Boston Consulting Group, David Rhodes, Daniel Stelter and Shubh Saumya argue that well-run companies can be ready to make big, recession-combating structural changes only four to six weeks after beginning their analysis of the situation.

Managers need to start by considering the worst-case scenarios. “Even for many still-healthy companies, a drop in sales of around 20 per cent is sufficient to turn profits into huge losses and to send cash flow deep into the red,” they write.

Once the top team has grasped the possible severity of the situation, there are four priorities: “To protect the financial fundamentals, to identify ways to protect the existing business, to manage for the long term and optimise the relative valuation of the company.”

If you do not already have one, produce a weekly report on your cash position, BCG says. To protect the existing business, consider your pricing points. In the 1930s companies innovated around cheaper product ranges. The McDonald’s $1 menu or Danone’s Eco-Pack yoghurt in France are current examples of this. General Electric first developed its financing business in the Depression, helping customers purchase refrigerators with credit.

For the long term, BCG echoes the advice offered by Intel’s Andy Grove. Downturns are the best time to invest in research and development and product innovation, he used to say. Boldness now will help create new products that are ready for the market when it starts to recover.

With asset prices so low, acquisitions should also be possible, at least for those companies with relatively healthy balance sheets. “It’s time to go shopping,” Caroline Firstbrook, Accenture’s European head of strategy consulting, told a recent “dealing with the downturn” seminar in London.

Getting some of these core challenges right – pricing, products and M&A – is essential. But perhaps companies also need to grasp something more fundamental about the way the rules for business will change during and after this recession. Umair Haque, director of the Havas Media Lab, a consultancy, recently wrote a provocative article for Business Week magazine which declared that “traditional recession strategies are doomed to fail this time”.

He argued that conventional business models – big industrial beasts pushing out more and more product – are doomed. He had Starbucks in his sights: “Starbucks tried to grow by selling us more junk we don’t need – music, mugs and mouse pads,” he wrote.

“What do we need in the 21st century – not just as brain-dead consumers, but as global citizens?” Mr Haque continued. “We need opportunities to grow and amplify our capabilities. For Starbucks that might mean, instead of hawking mugs and chocolates, training baristas to teach classes in coffee-making, letting communities use Starbucks as a venue for local government, or, at the limit, training local suppliers from developing countries as baristas in developed ones. How cool would that be? Very.” (But how profitable? It is not quite so clear.)

That critique may sound a little too flaky to business leaders who want quick wins now, simply to survive. For more practical ideas consider Adrian Slywotzky and Richard Wise’s sensibly titled book How to Grow When Markets Don’t

The authors have some simple suggestions that might just work. They ask a basic but important question: are all your customers really the same? On closer inspection you may have different customer segments lurking there that need to be served (and charged) differently. This offers the possibility of boosting revenues.

Do you have any special (and lucrative) customer relationships? Perhaps you are adopting specific approaches with these customers that could be copied and profitably introduced elsewhere. And are you really charging the right price for some of your valuable goods and services? Maybe there is concealed value in a bundle of services that are currently being offered at one price. Budget airlines have found a large number of ways to charge more for goods and services which customers used to enjoy for free. It can be done.

Finally, there is you, the boss. What about your own personal recession-beating strategy? Times like these will place enormous pressure on business leaders. Physical and mental health are valuable assets. You will need to be at your fittest if your leadership is not to suffer.

Peter Shaw and Steve Wigzell, executive coaches at the Praesta consultancy, have written a guide for senior managers leading teams through tough trading conditions. Leaders should understand how closely their behaviour will be scrutinised. “As a leader, be conscious that everything about you gives a message to your organisation; not only your words, but your posture, facial expression, tone of voice and appearance,” they write.

“The perception of your mood will spread like wildfire and will often become distorted through gossip. When one CEO asked his chairman what was the single most important thing he should be doing, the reply was: ‘Smile’.”

Smiling will not be enough to steer your business through the next few months. And as the Praesta coaches point out, when you are highly visible to others keeping up a cheerful act is exhausting.

The businesses that do make it through to calmer, post-downturn times will have basic balance sheet strength. They will stem all unnecessary outflows of cash. They will price their goods and services keenly, but also imaginatively. And they will continue to plan for the future, remembering that all downturns come to an end.

Simple, really. What is everyone getting so worried about?

Copyright The Financial Times Limited 2008